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CollegeBacker Review: 529 Plan to Start Saving for College Tax-Free

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Are you currently in a position where you want to start putting some money to one side each month to pay your child’s college education?

If so, you – like the vast majority of US consumers, are likely considering a conventional stocks and shares portfolio, or a mutual fund. Either way, there might just be a better option out there for you in the name of CollegeBacker.

In a nutshell, the platform allows you to benefit from a 529 Plan at the click of a button, meaning that your savings will be shielded from tax. Moreover, not only does CollegeBacker give you the option of choosing a 529 Plan that adjusts the underlying risks of its investments as your child gets older, but the platform also makes it a seamless process for friends and family members to add money to the pot as and when they see fit.

If you’re keen to find out more about CollegeBacker and its 529 Plan, be sure to read our comprehensive review. Within in, we’ll cover everything from how the platform works, who is eligible, how much you need to invest, how much your savings are likely to grow by, and more.

Let’s start by getting a brief overview of what CollegeBacker actually is.

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What is CollegeBacker?

  • Launched as recently as 2016, CollegeBacker is an online platform that offers a conventional 529 Plan at the click of a button.
  • Based in San Francisco, the platform aims to make college affordable for the average American.

This is especially pertinent in the US, as figures released by The College Board show that in the most recent academic year of 2018/19, students at public colleges paid an average of $21,370 per year.

When you multiply that figure by a conventional four-year degree program, the costs are nothing short of astronomical. Thinking of going the private university route? Well, the same organization puts the average cost at $48,510 per year.

As such, it is absolutely fundamental that you plan for your child’s college education at the earliest opportunity possible.

In fact, CollegeBacker themselves note that 20% of its client base started putting money into their 529 Plan before their child was born. In doing so, parents are giving themselves the best chance possible of saving enough money when their child does eventually reach college.

CollegeBacker Website

CollegeBacker recommends a 529 plan combined with an investment portfolio (typically an age-based one) to use with it:

  • 529 Plan: They will select a plan that it believes offers the perfect combination of low fees, stable administrations, and of course – a consistent record of achieving top-tier results.
  • Investment Plan: This is where your funds will initially be placed into higher-risk asset classes such as stocks and shares. Over time – and as your child gets closer to starting their college journey, the plan adjusts its risk levels to instead focus on safer assets – such as government treasuries and fixed-bonds.

When it comes to the numbers, CollegeBacker claims that its 529 Plans should yield a significantly higher rate of return in comparison to placing your funds into a savings account. For example, based on saving just $75 per month when your child turns 2, CollegeBacker estimates a total return of $29,300 at maturity.

On the contrary, it estimates a total return of just $15,900 had you made the same monthly contributions into a savings account. Crucially – alongside a number of other key variables, this is largely down to the tax-efficient savings that a 529 Plan yields. As per the CollegeBacker platform itself, the firm claims that it has saved parents over $15 million in student loan debts already, which is remarkable considering its infancy.

How Does a 529 Plan Work?

If you have no understanding of what a 529 Plan actually is, it’s crucial that we briefly outline the fundamentals.

  • First and foremost, the overarching concept of a 529 Plan is that it allows you to save money for an elected individual to contribute, or cover, the costs of higher education.
  • This isn’t limited to just a child, as you can save funds for virtually anyone – even yourself!
  • 529 Plans are especially popular with US consumers because of the tax advantages that they offer over alternative investment vehicles.

For example, if you instead opt for a conventional stocks and shares portfolio, mutual fund, or even fixed-rate bonds, you will be required to pay tax on any capital gains that your investments yield. On the contrary, you won’t pay a single cent of tax on your contributions to a 529 Plan.

529 Plan

However, it is also important to note that certain limits may exist.

  • For example, you need to make some considerations regarding your annual gift tax exclusion, not least because in the eyes of the IRS, 529 Plan contributions are classified as gifts.
  • As such, any contributions in the 2019 tax year that exceeded $15,000 will be subtracted against your lifetime exemptions and thus – must be reported on Form 709 when you eventually file your taxes.

Alternatively, 529 Plan platforms such as CollegeBacker also allow you to utilize the 5-Year Election Rule. This is highly useful if you are looking to make a large lump sum investment that exceeds the $15,000 limit.

How do I Contribute to my CollegeBacker Account?

CollegeBacker offers a number of payment options when it comes to making contributions. If you are looking to make a one-off contribution in the form of a lump-sum, then the platform supports most debit or credit cards.

You can also pay by linking your bank account by logging into online bank or adding your account number and routing number.

If you want to set up a regular monthly payment at a fixed amount, you will need to set up an Electronic Debit Agreement via your checking account. You can amend or cancel the agreement at any given time.

What we really like about CollegeBacker is that the platform makes it extremely easy for other backers to contribute to the 529 Plan. Ordinarily, conventional 529 Plan providers make it a somewhat cumbersome task when the non-primary account holder attempts to contribute money. However, this isn’t the case with CollegeBacker.

On the contrary, you can supply friends and family members with a unique link, which, once clicked upon, allows the individual to contribute. They can either execute a one-off payment via the link using a credit or debit card, or set up a monthly recurring payment.

Gifts

Accessing Your Funds at CollegeBacker

It is also important for you to have a firm understanding of what your rights are when it comes to accessing the funds held in your CollegeBacker-Linked 529 Plan.

First and foremost, the funds can only be used to pay for expenses related to higher education. This can be at any US-based college or university that is eligible for financial aid, as well as a number of academic institutions located overseas. Regarding the latter, you’ll need to check the eligibility of your chosen overseas college directly with the team at CollegeBacker.

In terms of what the funds can be used on, this isn’t capped to tuition fees alone. On the contrary, the 529 Plan can be used to help pay for other related academic costs such as on-site accommodation and books. When the time does arise for you to start making withdrawals from your pot, you can do this directly from within your CollegeBacker account portal. You can choose to have this wired directly to your bank account, or alternatively, straight to the college or university in question.

Leaving CollegeBacker and Non-College Related Withdrawals

While it would be wise to let your funds grow in your chosen 529 Plan in the long-run, there might come a time where you need to consider redeeming the funds.

Firstly, if you have a desire to switch 529 Plan providers – this isn’t a problem. Upon contacting the team at CollegeBacker, you can request to have your current 529 Plan – and all of the funds within it, transferred to another provider.

When it comes to making a withdrawal from your 529 Plan on non-qualified expenses (anything other than on eligible higher education costs), then you will be penalized financially. In fact, you’ll encounter a financial penalty on two-key fronts. Firstly, you will lose all of the tax savings that you would have otherwise made had you used the funds towards the beneficiary’s education.

Why Choose CollegeBacker

This is likely to be highly substantial, especially if you have held the 529 Plan over a number of years. On top of losing your tax-efficient savings, you will also pay a financial penalty of 10%. However, both of these charges are based on the financial gains that the underlying 529 Plan made, and not on the actual contributions themselves.

Alternatively, you also need to consider the possibility that your child eventually decides that they do not want to attend college, or they subsequently decide to drop-out before completing their studies. In this instance, you also have the option of transferring the funds to another elected individual. Once again, this doesn’t have to be your child, as the funds can go anywhere within your family – as long as they are used to fund higher education.

Ultimately, it is important to remember that as the account holder of the 529 Plan – or any 529 Plan for that matter, you will always remain in full control of the funds. Irrespective of who you elect as the beneficiary, you will have the final say on who gets the funds, and where they end up going.

How Much are my Savings Likely to be Worth at Maturity?

There really isn’t a hard and fast rule as to how much your 529 Plan will be worth when it comes to maturity, not least because this will be dependent on a number of key variables.

For example, the biggest contributor to the future value of your pot will center on the amount that you contribute each year, and the number of years that you do this for. For example, you would save considerably more by injecting $100 per month for 18 years, in comparison to investing $500 per year for 7 years.

The overarching reason for this is that the longer you have the funds invested, the more time you will allow the funds to earn compound interest. In doing so, the reinvestment of your 529 Plan gains will allow your pot to grow much faster.

Calculator

CollegeBacker actually provides a really useful calculator on its site that allows you to play around with the figures. You can adjust the age of your child when you first start saving, the amount that you plan to contribute per month, and any other contributions you will expect from family members and friends.

Calculator

For example, let’s say that you decided to open the CollegeBacker-Linked 529 Plan as soon as your child is born.

  • If you invested $250 per month, and the pot also received $5 per month from three other family members, the platform notes that your savings would be worth $114,100 at the time your child is ready to start college.
  • Sticking with the same variables, but increasing your monthly contribution from $250 up to $300, your projected maturity date would yield $135,700.

However, don’t forget that these figures are just estimations, so there is no guarantee that they will come to fruition. Nevertheless, it’s a great tool for you to be able to gauge how much your child’s education pot could be worth in the future by making small, but frequent, contributions throughout their childhood.

Will I Need to pay any Fees at CollegeBacker?

Irrespective of how much or little you decide to invest over the course of your 529 Plan at CollegeBacker, the platform will never charge you any fees. This includes making contributions into your pot, as well as withdrawing the funds out at the time of maturity.

However, you will need to pay a 10% fee if you need to make a withdrawal from your CollegeBacker pot for expenses that are unrelated to higher education. As we noted earlier, this will be charged on the gains that your 529 Plan made, as opposed to the actual contributions themselves.

Conclusion

If you are thinking about saving for your child’s college then a 529 Savings plan makes perfect sense to shelter your investments from taxes. CollegeBacker is a great way to get started, it’s super simple to signup for and start saving and you can also accept gifts from friends and relatives towards the savings.

The calculator is a useful tool to help you visualize how much money you can save based on monthly contributions and your child’s current age.

It should be noted that returns are not guaranteed as with any investment.

We recommend you take a look if you are starting to think about college fees for your dependents.

Visit CollegeBacker

CollegeBacker

9

Ease of Use

9.0/10

Fees

9.0/10

Reputation

9.0/10

Customer Support

9.0/10

Design

9.0/10

Pros

  • High rate of return possible
  • Optional fees
  • No contribution limits
  • Tax Sheltered Returns
  • No minimum balance

Cons

  • Returns not Guaranteed
  • Online Only
Kane Pepi

Kane holds a Bachelor's Degree in Accounting and Finance, a Master's Degree in Financial Investigation and he is currently engaged in a Doctorate - researching financial crime in the virtual economy. With a keen passion for research, he currently writes for a variety of publications within the Financial and Cryptocurrency industries. kane@moneycheck.com


Editorial Disclaimer: Opinions expressed here are the author’s alone, not those of any bank or credit card issuer and have not been reviewed, approved or otherwise endorsed by any of these entities.


Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.


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